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When we invest, we're generally looking for stocks that outperform the market average. Buying under-rated businesses is one path to excess returns. For example, long term Algonquin Power & Utilities Corp. (TSE:AQN) shareholders have enjoyed a 87% share price rise over the last half decade, well in excess of the market return of around 33% (not including dividends). However, more recent returns haven't been as impressive as that, with the stock returning just 11% in the last year , including dividends .
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.
During five years of share price growth, Algonquin Power & Utilities achieved compound earnings per share (EPS) growth of 45% per year. The EPS growth is more impressive than the yearly share price gain of 13% over the same period. So it seems the market isn't so enthusiastic about the stock these days. The reasonably low P/E ratio of 11.71 also suggests market apprehension.
You can see how EPS has changed over time in the image below (click on the chart to see the exact values).
We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here..
What About Dividends?
As well as measuring the share price return, investors should also consider the total shareholder return (TSR). Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. We note that for Algonquin Power & Utilities the TSR over the last 5 years was 135%, which is better than the share price return mentioned above. And there's no prize for guessing that the dividend payments largely explain the divergence!
A Different Perspective
Algonquin Power & Utilities shareholders are up 11% for the year (even including dividends). But that return falls short of the market. If we look back over five years, the returns are even better, coming in at 19% per year for five years. It's quite possible the business continues to execute with prowess, even as the share price gains are slowing. It's always interesting to track share price performance over the longer term. But to understand Algonquin Power & Utilities better, we need to consider many other factors. To that end, you should learn about the 5 warning signs we've spotted with Algonquin Power & Utilities (including 2 which are significant) .
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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